All the Devils Are Here [216]
Then again, maybe hope was a strategy. Ward also reports that around this time a former Lehman bond trader named Peregrine Moncreiffe bumped into a friend who was working for John Paulson. Fuld had recently visited Paulson’s offices. “Fuld told us he’s deliberately going to keep the balance sheet big,” the friend told Moncreiffe. “He thinks that this way, the government will have no choice but to save him.”
On June 9, Lehman preannounced its second-quarter earnings, saying it would lose $2.8 billion. That day, Skip McGee, Lehman’s head of investment banking, forwarded a message to Fuld from another banker. “Fyi—representative email,” McGee wrote. The message read, “Many, many bankers have been calling me in the last few days. The mood has become truly awfull [sic] and for the first time I am really worried that all of the hard work we have put in over the last 6/7 years could unravel very quickly.... Senior managers have to be much less arrogant and internally admit that some major mistakes have been made. Can’t continue to say ‘we are great and the market doesn’t understand.’” Lehman’s stock price fell below $30 a share, a 60 percent decline over the past year.
Three days later, Lehman announced that it was firing Erin Callan, its chief financial officer—who had become the face of the firm as she attempted to fight the rumors that it was in trouble—and its president, Joe Gregory. Somebody had to be sacrificed to the market gods, and they were chosen. The next day, Citigroup, which cleared trades for Lehman, asked the company to provide it with a “comfort deposit” of between $3 billion and $5 billion to help cover Citi’s exposure to the firm. (The amount was later negotiated down to $2 billion.)
“Market is saying Lehman cannot make it alone,” wrote Citigroup risk management officer Thomas Fontana to his colleagues. “Loss of confidence here is huge at the moment.”
On July 10, 2008, a story appeared on the front page of the Wall Street Journal that began, “The Bush administration has held talks about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter, according to three people familiar with the matter.” The next morning, the New York Times chimed in. “[S] enior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen,” the paper said. Fannie’s stock, which had slowly fallen to under $20 over the previous year, dropped 50 percent in two days. It was barely in double figures.
Mudd picked up the phone and called Paulson. “Jesus, Hank,” he said. Paulson, says one person familiar with the conversation, told Mudd that he had “raised hell,” telling the White House staff—who Mudd assumed were the source of the leaks—that they needed to keep out. (Paulson insists, “I can guarantee with 100 percent certainty that the White House knew nothing about a conservatorship strategy,” because at that point, that wasn’t part of Treasury’s plan.)
Two days later, IndyMac, the Countrywide spinoff, was taken over by the FDIC. IndyMac’s distinction had always been that it specialized in Alt-A loans, as opposed to subprime mortgages. The government takeover was a rude awakening for investors who believed that Alt-As were somehow safer than subprime loans. They weren